What information must a company issuing bonds provide to avoid liability for damages? – Supreme Court ruling

The Supreme Court, in its judgment of 23 June 2020 (case ref. V CSK 506/18), ruled that when issuing bonds in a private placement, the mortgage security holds significant marketing importance; therefore, purchasers must be provided with all information relating to the real estate. The case concerned the sale of bonds secured by mortgages on 28 properties valued at PLN 42 million, which, however, belonged to third parties and not to the issuing company.

Company bankruptcy and purchaser’s lawsuit

The purchaser bought 300 bonds from the issuing company at a price of PLN 10,000 each. The company failed to redeem the bonds within the contractual deadline and subsequently declared bankruptcy. The purchaser claimed compensation resulting from the purchase of bonds from the company’s board members amounting to over PLN 3 million (plus interest).

The claimant based his claim on Article 415 of the Civil Code (tort liability), according to which anyone who causes damage to another through their fault is obliged to remedy it. The claim was dismissed as unfounded. The first-instance court found that the purpose of the issuance was correctly stated, the claimant was not misled, and no information necessary for making a decision to purchase the bonds was concealed. The error was attributed to the claimant for not reviewing the documentation before purchasing the instruments from the company. The purchaser argued, however, that despite the availability of property valuations securing the bonds, they could not be liquidated as they were already encumbered.

The first-instance judgment was appealed to the Court of Appeal, which subsequently dismissed the appeal. This time, the claimant based his demand on Article 484 of the Commercial Companies Code. The basis for liability was therefore the alleged concealment of information regarding the issued bonds. The Court of Appeal disagreed with this argumentation, as it did not find the defendant company’s conduct unlawful and upheld the first-instance court’s view regarding the claimant’s responsibility for not reviewing the documentation and the financial condition of the issuing company.

Supreme Court’s position

The cassation complaint was based on alleged violations of Article 10(1) and (2) of the Bonds Act of 1995, Article 415 of the Civil Code, and Article 484 of the Commercial Companies Code. In addition to arguments raised before the lower courts, the claimant’s attorney argued that the bond sale offer did not disclose the risks of purchase (as required by the Bonds Act). The claimant further maintained that there was a concealment of information about the encumbrance on the real estate serving as collateral.

The defendant, on the other hand, pointed to the proper provision of the valuation report to bondholders (without the necessity of formal delivery), as well as the financial statements and valuation by an authorised expert. The issuing company also argued that no false information was included in the offer.

The Supreme Court noted that the courts of both instances made several errors in their analysis of the case. First, they failed to assess the unlawfulness of the issuing company’s conduct in terms of informing purchasers about all the data of the offer. It was also not clearly explained what information the intermediary conveyed to the claimant, which is crucial for making an investment decision. Furthermore, the Supreme Court stated that the Court of Appeal overlooked the significant marketing importance of the mortgage security as part of the bond issuance.

Given these circumstances, the Supreme Court decided to overturn the judgment of the appellate court and remand the case for reconsideration by the Court of Appeal. At the same time, it emphasised the complex nature of the case and its considerable significance for the credibility of the capital market.